A report just issued by the Blockchain Transparency Institute (BTI) concludes that 80% of the trading volume of the most significant cryptocurrency pairs consists of wash trades.
A wash trade is one in which a malicious actor, human or machine, places both buy and sell orders in an attempt to deceive other market participants and manipulate the price.
The only exchanges analyzed by the BTI which they conclude have 100% genuine trade volume were Bitfinex and Binance. (Note that we are not endorsing these exchanges; we are simply noting the study’s conclusion.)
We therefore reiterate: the crypto market is still in its infancy, and like other markets in their early stages, it is a “wild west” where there are many malicious actors seeking to defraud speculators.
While there are trustworthy exchanges — primarily U.S. based, regulatory-compliant exchanges with robust, third-party vetted cybersecurity protocols — findings such as this demonstrate that price discovery in crypto markets is extremely opaque and unreliable.
Regulations and legal structures are improving, and compliant, institutional solutions are advancing. As initiatives such as Intercontinental Exchange’s [NYSE: ICE] Bakkt cryptocurrency platform advance and go live, the influence of poorly regulated, fraud-ridden exchanges will decline. But we’re not there yet — and that is one major reason why the crypto bear is still on the prowl.
Investment implications: Cryptocurrencies remain in a bear market in large part because speculators rightly have little confidence in the transparency of crypto price discovery. One sign of an eventual end to the crypto bear will be the increasing presence of institutional-grade regulated trading venues — a presence which will eventually reduce the influence of the manipulated exchanges.
